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Economic Brief
April 2022, No. 22-14

Are Some Homebuyers Strategically Transferring Climate
Risks to Lenders?
By Toan Phan

Recent empirical research suggests that certain homebuyers may be strategically
transferring climate risks to banks via the mortgage market, and banks may be
transferring such risks to government-sponsored enterprises via securitization.
The evidence highlights the nuanced ways in which participants in the financial
markets strategically adapt to climate change.
As the issue of climate change becomes increasingly salient, there has been increased
attention to the need for economies to adapt. A large and growing economic research
literature documents that physical adaptation strategies — ranging from adopting more
drought-resilient crops to equipping buildings with air conditioning and upgrading urban
infrastructure to be more resilient to floods and hurricanes — are expected to help protect
households, firms and communities from intensifying climate-related disaster risks.1
However, we know less about financial adaptation, or how participants in financial markets
adapt to climate change and whether their actions have implications for society at large.
And generally, much less is known about how climate risks affect debt markets (including
the mortgage market) despite the critical role these markets play in the financial system.2

Financially Adapting to Climate Risks
In my recent working paper "Leveraging the Disagreement on Climate Change: Theory and
Evidence" — co-authored with Laura Bakkensen from the University of Arizona and Russell
Wong from the Richmond Fed — I found some fascinating patterns of a certain financial
adaptation strategy taken by some participants in the U.S. coastal residential property and
mortgage market.

We leverage an extensive proprietary database by Corelogic to examine the complete
history of single-family home sales across the U.S. East Coast from 2001 to 2016, including
property and sales characteristics and the associated mortgage contracts (if used). Using
the property's precise location, we match each property with its projected exposure to
coastal inundation risk under various sea level rise (SLR) scenarios, using a high-resolution
mapping tool developed by the National Oceanic and Atmospheric Administration.
Figure 1 provides an example of the high-resolution spatial variation of exposure to
inundation risk under the scenario of six feet of SLR for Miami. We focus on SLR risk as it is
one of the most important and salient physical risks associated with climate change.3

One important characteristic of climate change is that there is significant heterogeneity in
people's beliefs about it. Figure 2 illustrates this belief heterogeneity, averaged across U.S.
counties and using data from a well-known survey conducted by Yale University's Climate
Communication program. We incorporate this Yale climate opinion survey data into our

To identify the effects of SLR on real estate and mortgage outcomes using our data of
nearly a million coastal property transactions, we compare the purchases of properties that
are exposed to SLR risk to those of unexposed properties but are otherwise very similar
(same ZIP code, same number of bedrooms, same transaction month/year, similar
elevation and similar distance to coast). Our results are summarized in Figure 3 below.

We find robust evidence that purchases of homes more exposed to SLR risk are more likely
to be leveraged and tend to use mortgage contracts with longer maturity (and hence more
exposed to future climate risks), despite lower property prices. These results are driven by
buyers from counties with more pessimistic climate beliefs, who are more likely to be aware
of and concerned about SLR risk.
These findings suggest that buyers with more pessimistic climate beliefs (buyers from more
pessimistic counties) could be strategically transferring climate risks to banks by taking
long-term leveraged investment on properties exposed to future SLR. In fact, the findings
are entirely consistent with a theoretical model of real estate transaction where
homebuyers have varying degrees of beliefs about a property's long-run risk, and they
choose whether to leverage with a defaultable mortgage debt contract and choose the
contract's maturity.

Modeling Mortgage Risk and Climate Risk
We develop such a model in our paper. The model predicts that buyers with sufficiently
pessimistic beliefs relative to bank lenders are more likely to trade their exposure to climate
risk via long-term defaultable debt contracts.
Our model also predicts that expansionary monetary policies — which tend to increase the
supply of bank credit — could induce more leverage by pessimists and hence make the
mortgage market more vulnerable to climate change. This prediction is also supported by
our data: We find that pessimists are more likely to leverage on properties exposed to SLR
risk especially in times when the nominal interest rate is low.

Our findings on the shifting of climate risks via the mortgage market resonate with those in
the 2021 paper "Mortgage Finance and Climate Change: Securitization Dynamics in the
Aftermath of Natural Disasters." That paper finds evidence that banks can shift climate risks
to government-sponsored enterprises (GSEs) through securitization and sale of mortgages
below the conforming loan limit. This mechanism is potentially relevant and
complementary to our story.
Suppose banks can securitize and sell conforming mortgage contracts to GSEs, whose rules
and fees tend to reflect only current official flood-plain maps and do not necessarily reflect
future climate risks. We may expect that the effects of SLR exposure interacted with the
climate belief of buyers on leverage and maturity outcomes to strengthen in the segment of
conforming loans.
In contrast, suppose banks cannot as easily sell nonconforming mortgage contracts and are
thus more likely to hold them on their balance sheets. We may expect the effects of SLR
exposure and climate belief to weaken in the segment of nonconforming loans. This is
exactly what we find in our data: Our leverage and maturity results are almost entirely
driven by conforming loans as opposed to nonconforming loans.

To conclude, we think that there are two characteristics that make climate risks special:
They could have potentially large damages, especially to durable assets such as real
There is substantial disagreement over future climate risks, especially in the U.S.
Our paper finds that the combination of these two features is key in understanding the
effects of climate risks on the financial system. Our analysis implies that adaptation
strategies in financial markets — which are known to be subject to agency problems — may
have nontrivial implications, specifically due to the strategic transfers of climate risks.
Whether this could lead to concentration of climate risks and whether it could affect
financial stability or general welfare remain open questions for future research.
Toan Phan is a senior economist in the Research Department at the Federal Reserve Bank
of Richmond.

1 See for example the research literature survey in the 2021 book "Adapting to Climate Change."
2 Also see two of my articles from last year — "Climate Change and Financial Stability? Recalling

Lessons from the Great Recession" and "Pricing and Mispricing of Climate Risks in U.S. Financial
Markets" — on this topic of climate risks in the financial markets.

3 For example, as highlighted in the 2018 U.S. National Climate Assessment, more than 40

percent of Americans live in coastal shoreline counties, which are subject to SLR risk.
4 We use the 2014 vintage of the survey, as it overlaps with the sample period of our real estate


To cite this Economic Brief, please use the following format: Phan, Toan. (April 2022) "Are Some
Homebuyers Strategically Transferring Climate Risks to Lenders?" Federal Reserve Bank of
Richmond Economic Brief, No. 22-14.

This article may be photocopied or reprinted in its entirety. Please credit the author, source,
and the Federal Reserve Bank of Richmond and include the italicized statement below.
Views expressed in this article are those of the author and not necessarily those of the Federal
Reserve Bank of Richmond or the Federal Reserve System.

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